Long-Term Care Insurance: A Tricky Purchase Gets Trickier

How to buy a policy while insurers are exiting the market or raising premiums

What is the biggest potential expense aging boomers face? Long-term care — the umbrella term for the cost of nursing homes, assisted living centers, home care and other services for the frail elderly.

Consider these scary figures: A private room in a nursing home now averages $90,520 a year and the base cost for an assisted living community is $42,600, according to the MetLife Mature Market Institute’s latest survey.

You can only imagine what those numbers will look like over the next few decades when many of today’s 50- and 60-year-olds need those facilities. It’s a safe bet that costs will spiral, since long-term care inflation has outpaced health expenses over the past several decades. That’s why it’s so disconcerting that the long-term care insurance market is in such turmoil.

If you’re thinking about buying a policy, I have some suggestions, as you’ll see below.

Like all insurance, you hope you’ll never need to tap a long-term care policy. But it’s reassuring to know the coverage could help ease the financial burden if catastrophe strikes.

A Special Type of Disability Policy

“One way to think about long-term care insurance is that it’s disability insurance for the most likely disabilities after age 65,” says Jonathan Guyton, a certified financial planner and principal at Cornerstone Wealth Advisors in Edina, Minn.

Julie Schatz, a certified financial planner with Investor’s Capital Management in Menlo Park, Calif, says: “I tell clients, ‘You get long-term care insurance for the well person and not the unwell person.’”

The well person is the patient’s caregiver. That might be your spouse or child, who is likely to encounter mental and physical stress as well as a serious financial hit. When I attended the annual meeting of the American Gerontological Society of America in San Diego recently, I learned that the total cost of caregiving for the average working woman age 50 and over is $324,044; for men, it’s $283,716, according to John Migliaccio, director of research at the Metlife Mature Market Institute. (The cost differences are partly because women live longer than men and are also more likely to develop Alzheimer’s.)

Turbulent Time to Buy

Unfortunately, the long-term care insurance market is quite a mess these days.

A number of big insurers — like Metropolitan Life, Allianz Life and Prudential Financial — have stopped selling the policies because they’ve had a hard time making money on them. Meanwhile, the remaining companies offering long-term care insurance have been raising premiums. For example, Genworth Life recently raised prices 18 percent on most of its older policies and has a five-year plan to increase rates by more than 50 percent, on average, on older policies and 25 percent or more on newer ones.

At the same time, insurers are redesigning policies to make them less generous. For example, they’re abandoning lifetime benefits in favor of a dollar cap on the total amount of money that can be paid out. They’re also reducing inflation protection to 3 percent a year. On top of all that, you now have to be healthier than in the past to be approved for a policy.

But here’s a sobering thought: Without one of these plans you’ll foot the bill primarily on your own. Medicare won’t cover most long-term care charges. Medicaid, the joint federal and state safety net, does reimburse some of these costs, but you typically can’t have more than $14,800 in assets to qualify.

What to do?

The answer is relatively easy at the financial extremes.

Long-term care premiums are too steep for most people with assets of $250,000 or less. Most households with assets of $2 million or more can “self-insure” against the risk of infirmity, covering their costs out of savings. They might, however, buy a long-term care policy for peace of mind.

Advice for Long-Term Care Shoppers

But if you don’t fall into either end of that spectrum, I’d recommend you start looking at long-term care insurance at some point between age 50 and 60.

Budgets are usually tight for people younger than 50, often with kids in college and an urgent need to increase retirement savings. And long-term care premiums get quite expensive after age 60. For a 55-year-old couple, the average annual premium for a top insurer’s inflation-safe policy is $2,702, according to the American Association for Long-Term Care Insurance. That price soars to $4,304 for a 65-year-old couple.

But here’s the key: This protection is really part of a much bigger retirement-planning puzzle. “You can only make sense of long-term care insurance in the context of an overall financial plan,” says Joel A. Larsen, a certified financial planner at Navion Financial Advisors, in Davis, Calif.

Henry “Bud” Hebeler, head of the financial planning website Analyzenow.com recommends you answer these essential questions:

Will your Social Security, pension and investments provide enough income to pay for long-term care?

Will you have relatives who would be willing to help you?

Will you have a home that you could sell or use to get a reverse mortgage in order to support several years of long-term care?

Your financial plan will help determine not only whether you can afford a long-term care policy, but what kind of plan works best for you.

Fortunately, “long-term care policies have become more standardized,” says Allen Hamm, author of the e-book How to Plan for Long-Term Care. “They’re easier to understand and traps for the unwary have shrunk.”

Two Key Policy Provisions

A few pointers about long-term care policy provisions.

The elimination period. This is the time lag between submitting a claim and when you start receiving benefits. Today, a policy for a married couple with a 90-day elimination period is about 40 percent cheaper than one that kicks in right away. Most people that can afford a long-term care policy have sufficient savings to go for the 90-day elimination period.

Inflation protection is the most important option to select. Most plans used to routinely offer 5 percent compounded inflation protection, but now it’s usually 3 percent. Nevertheless, owning a policy with a built-in hedge against inflation is critical, even though it will raise the cost of the insurance.

For more advice on long-term care insurance shopping, I strongly recommend you read Hamm’s How to Plan for Long-Term Care and Personal Finance for Seniors for Dummies by Eric Tyson and Robert Carlson.

Alternatives to the Policies

What if you decide you can’t afford this kind of coverage?

In that case, look into buying life insurance and annuity products that include long-term care benefits. And ask if your employer offers long-term care as a benefit; if so, the premiums may be lower than what you’d pay if you bought a policy on your own.

Sadly, there’s no getting around it: Many middle-class boomers will find themselves priced out of the long-term care insurance market. A provision in President Barack Obama’s signature Affordable Care Act was supposed to help address this problem, but it was later dropped as unworkable. I expect the topic will be revisited during Obama’s second term. The pressure to help hard-pressed families is enormous and only likely to get worse.